Conclusions and recommendations
Introduction
1. The Committee concurs
with the FSA's assessment of the importance of the damage done
to the benchmark rates by the attempted manipulation that the
regulators discovered. Attempted manipulation of these reference
rates reduces trust and confidence in markets and carries costs
for end users. The Committee is concerned that the FSA was two
years behind the US regulatory authorities in initiating its formal
LIBOR investigations and that this delay has contributed to the
perceived weakness of London in regulating financial markets.
(Paragraph 7)
2. The Committee found
Mr Diamond's attempt to subdivide the later period of wrongdoing
neither relevant nor convincing. It does not appear that the conversation
between Mr Tucker and Mr Diamond made a fundamental difference
to Barclays' behaviour, given the repeated instances of 'low-balling'
submissions to the LIBOR fixing process by Barclays set out in
the FSA Final Notice covering the year running up to the phone
call between Mr Tucker and Mr Diamond. (Paragraph 8)
3. Barclays is just
one of many international banks under investigation for possible
market manipulation. It is important that Barclays' serious shortcomings
should not be seen in isolation from the possible actions of other
banks and we await the results of ongoing investigations. (Paragraph
9)
4. It is important
to state that Barclays' internal compliance department was told
three times about concerns over LIBOR fixing during the period
under consideration and it appears that these warnings were not
passed to senior management within the bank. Statements that everything
possible was done after the information came to light must be
considered against a background of serious failures of the compliance
function within the bank. In other words, the senior management
should have known earlier and acted earlier. (Paragraph 13)
5. Barclays received
a reduction in its fine because of its high degree of co-operation
with the FSA in its investigation. Barclays also disclosed wrongdoing
that it had itself found to the regulators. Any such disclosure
is likely to have carried serious risk of reputational damage.
Co-operation with inquiries needs to be encouraged by regulators,
who need to take into account first mover disadvantage, but it
does not excuse or diminish wrongdoing. Nor does the fact that
others may have been engaged in similar practices. The FSA and
its successors should consider greater flexibility in fine levels,
levying much heavier penalties on firms which fail fully to co-operate
with them. The FSA needs to give high priority to its investigations
into other banks, including those largely owned by the taxpayer.
(Paragraph 16)
6. Firms must be encouraged
also to report to the regulator instances they find of their own
misconduct. While such a firm should still be required to pay
compensation to any other party who has been disadvantaged by
the misconduct, in cases where a firm makes a complete admission
of its own culpability the FSA should retain flexibility in setting
the fine payable. The FSA should have regard to the desirability
of encouraging other firms to confess their misdemeanours in a
similar way. The FSA may also need to re-examine its treatment
of whistleblowers, both corporate and individual, in order to
provide the appropriate incentives for the reporting of wrongdoing.
(Paragraph 17)
Manipulation by individuals with the intention
of personal benefit
7. The actions that
have so far been discovered of Barclays and other traders were
disgraceful. As the FSA's Final Notice states, the attempted manipulation
of LIBOR "created the risk that the integrity of LIBOR and
EURIBOR would be called into question and that confidence in or
the stability of the UK financial system would be threatened".
This attempted manipulation of LIBOR should not be dismissed as
being only the behaviour of a small group of rogue traders. There
was something deeply wrong with the culture of Barclays. Such
behaviour would only be possible if the management of the bank
turned a blind eye to the culture of the trading floor. The incentives
and control systems of Barclays were so defective that they incentivised
traders to benefit their own book irrespective of the impact on
shareholders and the bank's overall performance. Now exposed,
their actions are to the detriment of Barclays' reputation and
the reputation of the industry. The standards and culture of Barclays,
and banking more widely, are in a poor state. Urgent reform, by
both regulators and banks, is needed to prevent such misconduct
flourishing. (Paragraph 34)
8. The attempted manipulation
of Barclays' LIBOR submissions with the intention of personal
gain continued for four years. It is shocking that it flourished
for so long. Any system may fail for a short period, but compliance
at Barclays was persistently ineffective. Even when Barclays'
compliance had indications that something was awry, it failed
to take the opportunity to strengthen the bank's controls. Nor
was there any pressure from senior executives within Barclays
to ensure that effective LIBOR controls were in place, as it was
considered low-risk, in particular where LIBOR setters sat, with
no presence of the compliance function. These are serious failures
of governance within Barclays, for which the board is responsible.
The compliance function within a bank is very important. If it
is weak or ignored in the practices of the bank that is reflective
of a poor culture which does not take seriously enough abiding
by the rules essential to proper functioning of the bank and the
wider financial system. The serious failings of the compliance
function during the period under examination suggest there was
this kind of culture at Barclays. (Paragraph 38)
9. During this period
of extremely weak compliance at Barclays, it was nonetheless subject
to extensive regulatory oversight by the FSA. Despite the numerous
ARROW visits that were conducted by the FSA during this period,
we have seen no evidence that this weakness in compliance elaborated
in the Final Notice was identified by the FSA in a timely manner,
still less, dealt with. The FSA must report to this Committee
on how it will alter its supervisory efforts to counter such weak
compliance in future. (Paragraph 39)
Manipulation during the Financial Crisis
10. Barclays has suggested
that there were numerous contacts between itself and the authorities
over LIBOR during this period. The clearest message appears to
have been given by Barclays to the Federal Reserve Bank of New
York, rather than to the UK authorities. Lord Turner described
some of Barclays' contact with the FSA as "elliptic".
We have found little evidence that Barclays provided the UK authorities
with a clear signal about dishonesty at other firms, or its own.
We await the outcome of the other regulatory investigations to
see whether other firms provided such a signal, were equally elliptical
or even silent on this problem. The timeline of contacts between
Barclays and regulators provided to the committee by Barclays
is not, of itself, evidence of a proactive approach on trying
to report irregularities in the setting of LIBOR rates. (Paragraph
60)
11. We would have
expected the FSA and the Bank of England to have made efforts
to identify and provide to the Committee documents clearly and
directly relevant to our inquiry, subject to statutory restraints.
(Paragraph 61)
12. The financial
crisis, and the serious dysfunctionality of the interbank lending
markets, meant that it was difficult during this period for firms
to estimate their own funding costs. LIBOR submissions were being
used by markets and regulators to assess the financial health
of the institutions involved. The FSA and the Bank of England
were engaged in crisis management, alert to the possibility of
further bank failures, rather than LIBOR manipulation. This is
understandable, given the circumstances of the financial crisis,
but with the advantage of hindsight constitutes a failing by the
authorities. (Paragraph 62)
13. Given the importance
of LIBOR submissions in assessing banks' health, Bank of England
staff were aware of the danger that banks might improperly manipulate
their submissions. They noted that "banks have been subject
to the more powerful incentive of avoiding stigma from being seen
to submit high rates reflective of what they are actually paying".
However, they primarily saw this as a matter for the regulator
rather than the Bank of England. Mr Tucker told us that possible
clues to dishonesty "did not set alarm bells ringing at the
time". The evidence suggests that the Bank of England was
aware of the incentive for banks to behave dishonestly, yet did
not think that dishonesty was occurring. Nor did it appear to
have asked the FSA to check to see if such dishonesty was occurring.
With hindsight this suggests a naivety on the part of the Bank
of England. They were certainly relatively inactive. This confirms
evidence from other Treasury Committee inquiries of the dysfunctional
relationship between the Bank of England and the FSA which existed
at that time to the detriment of the public interest. (Paragraph
63)
14. Unlike the Bank
of England, the Financial Services Authority was the prudential
regulator. Its shortcomings at this time are therefore far more
serious. The Committee is concerned about the FSA's failure to
appreciate the significance of market rumours relating to the
artificial rigging of the LIBOR rate. We therefore look forward
to the result of the FSA's internal investigation, the existence
of which was disclosed in evidence to us. The Committee will want
the findings of that investigation to be published. (Paragraph
64)
15. The evidence we
have received is that there was significant co-operation between
the US and the UK authorities at the time of the 2008 BBA review.
It is understandable that regulators, in response to the LIBOR
crisis, may have placed information in the public domain to demonstrate
their respective assiduity at the time. This release of information
must complement co-operation between regulators. The Chancellor
should stress to his counterparts the need for such co-operation
at the next G20 meeting. (Paragraph 65)
16. The BBA's review
of LIBOR in 2008, given that it focussed on the concerns of the
market over the LIBOR setting process, appears to have been an
opportunity missed to stop the attempted manipulation that was
occurring. The Wheatley review should now look at the role of
the BBA in LIBOR setting at that time in detail and publish its
findings. This is essential if its recommendations for a more
reliable LIBOR setting process are to carry credibility. The review
should include how such systems work during times of financial
crisis, when there may be little or no interbank lending taking
place, and how the authorities should respond to signs of dysfunction.
It should also consider whether a trade association is the appropriate
body to perform that role. (Paragraph 66)
17. We have seen no
explanation for the failure, both of Barclays' board and of senior
executives, to question its own firm's LIBOR submissions, when
its staff were complaining about the submissions of other firms,
and media and academic reports questioned the incentives present
in LIBOR setting. There appears to have been enough doubt being
spread about the LIBOR setting process to suggest that a closer
examination by Barclays board of its own practices should have
taken place. It stretches credibility to suggest that Barclays
was trying to alert regulators to inconsistencies in the LIBOR
submissions of other banks yet had no idea about the repeated
'low-balling' of its own submissions during the financial crisis
set out in the FSA Final Notice. We have found no evidence that
the board of Barclays sought to conduct an investigation. This
was one of a number of failings on the part of Barclays' board.
Others can be found in Sections 5 and 6. (Paragraph 67)
The Tucker Diamond dialogue and the Diamond File
Note
18. The evidence we
received suggests that Whitehall was prompted to contact the Bank
of England because of its concerns about whether the October 2008
rescue package for the UK financial system was working, as well
as concerns about the financial health of Barclays. This was understandable
given the fragility of the UK and international financial system
in October 2008. (Paragraph 99)
19. We will never
know the details of the discussion between the Mr Tucker and Mr
Diamond. What we do know is that Mr Tucker denied ever having
issued an instruction to Barclays whilst Mr Diamond denied having
received an instruction from Mr Tucker. (Paragraph 101)
20. The File note
is of secondary importance as far as the subsequent transmission
of the instruction is concerned. This is because Mr del Missier
told us that he acted, not on the basis of the File note, but
on the basis of the 29 October 2008 discussion he had with Mr
Diamond, following the conversation between Mr Diamond and Mr
Tucker. Mr del Missier informed us that the File note correctly
records the substance of the Tucker-Diamond discussion as relayed
to him by Mr Diamond, but not the exact words. There is no File
note of the conversation between Mr Diamond and Mr del Missier
and no recording was taken of their discussion. (Paragraph 102)
21. It remains possible
that the entire Tucker-Diamond dialogue may have been a smokescreen
put up to distract our attention and that of outside commentators
from the most serious issues underlying this scandal. (Paragraph
103)
22. From Mr del Missier's
evidence it appeared that Mr Dearlove was comfortable with the
instruction that was passed to him following his 29 October 2008
conversation with Mr Diamond. There was some resistance from the
submitter, who emailed compliance with his concerns. However,
he or she ultimately acted on the instruction. There appears to
have been, once again, no real 'push-back' from the compliance
function when they were informed by Group treasury of the instruction.
This lack of 'push back' demonstrates the weakness of the compliance
function in Barclays at that time. It may also reflect the fact
that Group treasury had been submitting false rates since September
2007 and that, to this end, Mr del Missier's instruction was not
a departure from prevailing practice. It is unclear to the Committee
why Barclays has attempted to place such weight on the Tucker-Diamond
phone call given the pattern of repeated dishonesty in LIBOR submissions
in the months running up to this phone call set out in the FSA
Final Notice. Barclays did not need a nod, a wink or any signal
from the Bank of England to lower artificially their LIBOR submissions.
The bank was already well practised in doing this. Mr del Missier
appears to have stressed the fact that what he saw as an instruction
came from the Bank of England and that this may have muted resistance
to it. Mr del Missier's evidence, that he received such an extraordinary
instruction from the Bank of England, yet subsequently queried
it neither with Mr Diamond nor with those to whom he passed the
instruction, is not convincing. He would have known that falsifying
LIBOR submissions was not permitted. (Paragraph 105)
23. The Committee
remains sceptical about the importance of the Tucker-Diamond phone
call given the already established pattern of dishonest LIBOR
submissions from Barclays set out in the FSA Final Notice. The
lack of a record by the Bank of England of the conversation between
Mr Tucker and Mr Diamond is of great concern. The fact that Mr
Tucker failed to make a contemporaneous note of the conversation
is explicable given that the UK was in the midst of the most serious
financial crisis in modern times: there was unprecedented pressure
on senior Bank of England staff at this time. Nonetheless, the
Bank of England should have had adequate procedures in place for
at least the making of a File note of such conversations. We recommend
that the Bank undertake a review of its note keeping systems,
especially those involving senior executives, and publicly report
its conclusions. (Paragraph 107)
24. If Mr Tucker,
Mr Diamond and Mr del Missier are to be believed, an extraordinary,
but conceivably plausible, series of misunderstandings and miscommunications
occurred. The evidence that they separately gave describes a combination
of circumstances which would excuse all the participants from
the charge of deliberate wrongdoing. (Paragraph 108)
Barclays and the FSA
25. We endorse Mr
Diamond's view, which echoes that of the Group of Thirty, that
the culture of an organisation is demonstrated by how people behave
when no-one is watching. In this case, however, the culture of
the Barclays allowed people to do the wrong thing quite openly
over a long period, with the attempted manipulation being shouted
about across the dealing room floor. Barclays was found to have
fallen lamentably below the standards that the former Chief Executive
suggested should be set for his own firm. (Paragraph 112)
26. We appreciate
that Mr Diamond may not have recently read the letter of September
2010 from Mr Sants to Mr Agius in connection with his appointment
as Chief Executive when he appeared before us, or have had the
discussions about his appointment as chief executive at the front
of his mind. However, we find it difficult to accept Mr Diamond's
evidence with respect to his apparent unawareness of the matters
raised by the FSA with the Chairman of Barclays in connection
with his appointment as chief executive in September 2010. The
evidence of the Chairman of Barclays is that he did raise them
with Mr Diamond, as one would expect. It seems unlikely that they
were not raised with him. If they were appropriately raised, it
seems unlikely that they would be quickly forgotten. (Paragraph
122)
27. The FSA expressed
concerns in connection with the appointment of Bob Diamond as
chief executive to Barclays. The concerns were about an attitude
to risk and a tendency to "push the limits" in areas
where Mr Diamond was directly involved. The concerns were not,
however, serious enough to prevent the regulator from approving
his appointment. Barclays appears to have regarded the points
raised by Mr Sants as "issues" rather than "concerns".
On the basis of the evidence it is unclear whether Barclays 'got
the message'. To avoid the scope for misunderstanding in future,
we recommend that the regulator set out clearly for firms any
concerns it has about a senior appointment, listing any actions
that it requires. It should ensure that a response is obtained
in writing from the firm, undertaking to meet each of the requirements.
Failure by the firm to show evidence that the regulatory messages
have been seen and acted upon should be considered a serious matter.
(Paragraph 124)
28. Mr Bailey does
not recall saying that he was "specifically happy" about
the tone at the top—in fact he says that the phrase "tone
at the top" is Barclays' own. Mr Diamond, however, told us
that the regulator was specifically pleased with his relationship
with the FSA. The FSA told us that it had concerns about its relationship
with the firm, but was not able to point to evidence directly
linking those concerns to the behaviour of Mr Diamond. However,
as Chief Executive he was responsible for the state of his firm's
relationship with the regulator, and for demonstrating to the
regulator that the necessary action was being taken to remedy
shortcomings. The fact that the Barclays board discussed the need
to get the "tone from the top" right, and how important
this was to Barclays, after Mr Bailey left the board meeting,
suggests that the Barclays board did appreciate his message. This
appreciation was lacking in Mr Diamond's evidence. We do not accept
Mr Diamond's evidence on this point. It stands in contrast to
the evidence of Mr Bailey and the minutes of the discussion at
the board meeting. It seems certain that Mr Bailey did express
concern to the board. It is possible that Mr Diamond did not appreciate
the significance of what was said. If so, this lack of appreciation
could be considered part of the problem which the FSA was seeking
to address. (Paragraph 134)
29. The impression
that Mr Diamond gave to the Committee as to the significance of
the FSA's message to the 9 February 2012 board meeting sits uneasily
with Barclays' own board minutes. Mr Bailey of the FSA has also
told us that in his view the evidence from Mr Diamond to the Committee
failed to convey the severity of the matters under discussion.
(Paragraph 138)
30. Lord Turner's
letter to Mr Agius was described by the former as a follow up
to the meeting between them which was itself a follow up to the
February 2012 Barclays board, meeting at which Mr Bailey spoke.
The fact that it was not described to Mr Diamond as a follow up
letter to the April meeting between Lord Turner and Mr Agius is
scarcely relevant. What matters is that it was part of a process
of following up a board meeting which he attended and about which
he was prepared to tell us virtually nothing in evidence. We
accept Mr Bailey's conclusion that Mr Diamond's evidence on this
point was "highly selective". We also note that Lord
Turner was "surprised" at Mr Diamond's apparent ignorance
of the letter. Our conclusion is that Mr Diamond's evidence was
unforthcoming and highly selective on this point. (Paragraph 143)
31. We have considered
the evidence of Mr Diamond and other witnesses on Barclays' relationship
with the FSA. His evidence denying that the FSA felt that trust
had broken down between itself and Barclays is inconsistent with
that of Mr Bailey. We are unable to accept Mr Diamond's assessment
of the seriousness of the matters discussed at the February 2012
board meeting: in the light of all the circumstances, it seems
to us inconceivable that Mr Diamond could have believed that the
FSA was satisfied with the tone at the top of Barclays when the
evidence from the FSA is that this was not the case. He did not
mention the important and trenchant letter of Lord Turner to Mr
Agius, setting out major concerns of the FSA, when he had ample
opportunity to do so. It is very unlikely that he was unaware
of that letter, or its significance as a follow up to the firm
messages given to the Barclays board by Mr Bailey in February
2012.Having heard the evidence of Mr Diamond and the FSA on these
points, the Committee prefers the evidence of the FSA. Select
committees are entitled to expect candour and frankness from witnesses
before them. Mr Diamond's evidence, in the Committee's view, fell
well short of the standard that Parliament expects. (Paragraph
144)
32. The Parliamentary
Commission on Banking Standards' examination of the corporate
governance of systemically important financial institutions should
consider how to mitigate the risk that the leadership style of
a chief executive may permit a lack of effective challenge or
to the firm committing strategic mistakes. (Paragraph 155)
33. Mr Agius denied
misunderstanding the seriousness of relations with the FSA, and
sought to give the impression that the February meeting was one
that might be expected between a regulator and a bank. He also
drew a distinction between the messages delivered by Mr Bailey
in February 2012 and that from Lord Turner in April. Both of these
interpretations are contested by the FSA, who said that the Bailey
visit and the Turner exchanges arose from the same concerns and
were part of a single process, and that the visit of Mr Bailey
was quite different in character from normal regulatory exchanges.
For Mr Bailey the minutes of the Barclays board were significant.
He considered that the board had realised the seriousness of affairs.
Yet, according to Mr Agius, the Chairman only realised it when
he later met and then, in April, corresponded with Lord Turner.
This looks implausible, but the senior non-executive director
told the Governor of the Bank as late as 2 July that he had not,
until that moment, appreciated the loss of confidence on the part
of regulators in the senior executive management of Barclays.
(Paragraph 157)
34. It is at least
possible that the message from the FSA's governance review may
have obscured some of the messages that Mr Bailey and Lord Turner
thought they were hammering home to the Barclays board. (Paragraph
158)
35. The messages that
Lord Turner and Mr Bailey gave to the Barclays board this year
provide evidence of the evolution of a more judgement-led approach
on the part of the FSA. Lord Turner said that the change to this
approach began as long ago as 2008, and it featured in his Mansion
House speech in 2009. Judgement-led regulation is welcome: the
FSA has concentrated too much on ensuring narrow rule-based compliance,
often leading to the collection of data of little value and to
box ticking, and too little on making judgements about what will
cause serious problems for consumers and the financial system.
In February, though, the FSA judged that it was the overall culture,
rather than just a particular behaviour, of Barclays that represented
a risk, and so took steps to address this directly. This intervention
was not routine or coded. It was a loud and clear expression
of the concerns the FSA had about the culture at Barclays and
should have been clearly understood by the board. This innovative
action is also welcome. The episode shows, however, that judgement-led
regulation will require the regulator to be resolutely clear about
its concerns to senior figures in systemically important firms.
(Paragraph 159)
The resignations
36. Barclays' initial
response to the publication of the FSA Final Notice was to announce
that four senior executives would waive their bonus for one year.
This proved to be a wholly inadequate response to the scale and
severity of the wrongdoing discovered by the regulatory authorities.
Barclays itself acknowledged that its response to the FSA Final
Notice was inadequate and, as Mr Agius told us, "there was
a requirement for some further action from the bank". (Paragraph
185)
37. Both the Governor
of the Bank of England and the Chairman of the FSA have stressed
that they did not demand Mr Diamond's resignation, but instead
pointed out the difficulties of Mr Diamond continuing in post
and left the final decision to the Barclays board. However, both
the Governor and Lord Turner must have been aware that it would
have been extremely difficult, if not impossible, for Mr Diamond
to stay in post after having lost the confidence and support of
the regulatory authorities. Therefore, Mr Diamond's resignation
as Barclays CEO was a fait accompli once both men intervened.
(Paragraph 186)
38. The FSA did not
intervene with respect to Mr Diamond's future as Barclays CEO
prior to, or on Wednesday 27 June 2012, when the FSA Final Notice
was published. Indeed, the FSA only appears to have intervened
on Friday 29 June, two days after the publication of the Final
Notice. This perplexed Marcus Agius who told us "we went
from Wednesday, [27 June] when Bob Diamond had the support of
the regulators, to Monday night [2 July], when we were told in
no uncertain terms that he did not have the support of the regulators".
This about-turn by the FSA appears to have been the result of
the vociferous public and media reaction in the days following
the publication of the Final Notice. If this is indeed the case,
then what many would consider the right decision was taken for
the wrong reasons. (Paragraph 187)
39. Neither the FSA
or the Bank of England should intervene to remove senior bank
executives to placate public, media and Parliamentary opinion.
There will be circumstances in the future where they will need
to act, but without the force of public opinion to support them.
On other occasions the regulatory authorities will need to stand
firm and not intervene despite public and political pressure for
them to do so. (Paragraph 188)
40. Lord Turner attempted
to convince Marcus Agius that the Barclays board needed to give
serious thought to whether Mr Diamond was the right person to
lead Barclays in the future. Lord Turner appeared to come away
from his discussion with Mr Agius confident that Mr Diamond would
resign. However, Mr Agius then proceeded to resign himself in
what we can only conclude was a last ditch attempt to keep Mr
Diamond in post. Therefore, either Lord Turner's message to Mr
Agius was not clear or forceful enough or Marcus Agius was deaf
to Lord Turner's message. It then took the intervention of the
Governor of the Bank of England before the Barclays board became
convinced that Mr Diamond had to go. The Governor's involvement
is difficult to justify. The Governor defends his involvement
by pointing out that the Bank of England will soon have regulatory
responsibility for the prudential supervision of banks. However,
the Bank does not, at present, have regulatory responsibility
for the banking system. Any attempt to discuss Mr Diamond's future
as Barclays CEO should have come from the FSA and not the Governor
of the Bank of England. The Governor's involvement is particularly
surprising given that he has told the Treasury Committee in the
past that he has been unable to act because the Bank did not have
responsibility for this, or that, particular area of policy. Indeed,
this is the very defence he and Mr Tucker have used when explaining
why they did not intervene in LIBOR, despite suspecting problems.
(Paragraph 189)
41. Whatever the merits
of the action taken by the Governor of the Bank of England and
the Chairman of the FSA—and this Committee has sympathy
with the conclusions they had drawn about the leadership of Barclays—the
action they took has exposed implicit, and potentially arbitrary,
power to force out senior figures in the financial services industry.
The return of the 'Governor's eyebrows'—which many will
welcome on this occasion—comes with the need for corporate
governance safeguards. (Paragraph 190)
42. In this case,
the Governor of the Bank of England and senior FSA staff did discuss
the issue and acted in concert. There was, as a result, some minimal
check and balance. However, once the Bank of England assumes full
responsibility for financial stability and micro-prudential supervision,
even this minimal check and balance will disappear. The Governor
of the Bank of England will stand all-powerful and able, by dint
of raising his eyebrows, effectively to dismiss senior banking
executives without discussing it with, or consulting, anyone.
This is unsatisfactory. As the Treasury Committee has repeatedly
stated, a much stronger governance framework is needed. Among
other things this can ensure that the regulatory authorities are
unable to remove senior bank executives arbitrarily or without
just cause. We welcome the fact that the Chairman of the FSA agrees
with us that governance processes must be put in place to ensure
accountability and transparency for the process of removing senior
bank executives in whom the regulators have lost confidence. (Paragraph
191)
43. According to the
Chairman of Barclays, Mr Diamond continued to enjoy strong shareholder
support. If this is indeed the case, then the actions taken by
the Governor and the Chairman of the FSA were in opposition to
the position of major Barclays shareholders. Although Lord Turner
asserts that support for Mr Diamond had fallen away over the course
of the weekend of 30 June 2012, there was no strong public clamour
from institutional investors for the removal of Mr Diamond. The
regulatory authorities need to possess the ability to remove senior
executives, but when they exercise this power, they should recognise
their duty of care to shareholders. This issue should be examined
by the Bank of England, the FSA and its successor bodies. (Paragraph
192)
44. The UK Corporate
Governance Code is clear that "the board should set the company's
values and standards". However, the misconduct of LIBOR and
breakdown of trust with the regulatory authorities has demonstrated
that the Barclays board has presided over a deeply flawed culture.
(Paragraph 193)
Enforcement
45. The Committee
regrets that the FSA's acting director of enforcement and financial
crime did not take the opportunity to explain how the factors
the regulator takes into account had been applied to Barclays
in this case. We are concerned about the lack of transparency
in the way in which the FSA calculated the amount of the fine.
(Paragraph 197)
46. The Committee
urges the Wheatley review to consider the case for amending the
present law by widening the meaning of market abuse to include
the manipulation, or attempted manipulation, of the LIBOR rate
and other survey rates. They should also consider the case for
widening the definition of the criminal offence in section 397
of FSMA to include a course of conduct which involves the intention
or reckless manipulation of LIBOR and other survey rates. (Paragraph
199)
47. The FSA apparently
believes that its fees are not raised for the purpose of prosecuting
offences other than those set out in FSMA. The Committee is concerned
by this. The FSA has responsibility for regulating the key participants
in financial markets. The FSA's decision whether to initiate a
criminal prosecution should not be influenced by the fact that
its income is derived from firms which it regulates. The FSA has
an obligation under section 2(1)(b) of FSMA to discharge its functions
in the way in which it considers most appropriate for the purpose
of meeting its regulatory objectives. Under section 2(2)(d) the
reduction of financial crime is one of these objectives. Financial
crime is defined in section 6(3) as including not only misconduct
in relation to a financial market but also any criminal offence
of fraud or dishonesty. The FSA took a narrow view of its power
to initiate criminal proceedings for fraudulent conduct in this
case. The Committee recommends that the Government, following
the Wheatley review, should consider clarifying the scope of the
FSA's, and its successors', power to initiate criminal proceedings
where there is serious fraudulent conduct in the context of the
financial markets. (Paragraph 202)
48. The Serious Fraud
Office (SFO) is now conducting a criminal investigation into LIBOR.
The Committee was surprised that neither the FSA nor the SFO saw
fit to initiate a criminal investigation until after the FSA had
imposed a financial penalty on Barclays. (Paragraph 206)
49. The evidence in
this case suggests that a formal and comprehensive framework needs
to be put in place by the two authorities to ensure effective
relations in the investigation of serious fraud in financial markets.
The lead authority must be clearly identified for the purposes
of an investigation, and formal minutes of meetings between the
authorities must be maintained. We recommend that the Wheatley
review examine whether there is a legislative gap between the
responsibility of the FSA and the SFO to initiate a criminal investigation
in a case of serious fraud committed in relation to the financial
markets. (Paragraph 207)
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